How San Francisco Is Killing Its Restaurants
Author: Michael Saltsman
Publication Date: October 2019
Newspaper: Wall Street Journal
Labor costs and regulation are ruining a once-thriving industry. Congress should take it as a cautionary tale.
San Francisco was once known for trendy restaurants with lines out the door. Today, the city’s restaurateurs are concerned with keeping their doors open at all. Restaurant closings outpace openings by 9%, according to Yelp data analyzed by the Golden Gate Restaurant Association. In a recent meeting with the Board of Supervisors, one industry veteran said: “We need to do something now, or we will be gone.”
How did the outlook for a top restaurant city get so bleak? As Hemingway wrote of bankruptcy, it happened “gradually and then suddenly.”
Start with labor costs, which the San Francisco Chronicle identified as “the biggest factor.” In 2003 residents passed an initiative that set the minimum wage almost $2 above the state level and then linked it to rise with inflation. A decade later, another initiative incrementally lifted the wage floor to $15 an hour by 2018. On top of this, the city has separate ordinances regulating paid sick leave, employee health-care spending and workplace scheduling.
These costs are magnified by a quirk in California law that prohibits tip income from counting toward a restaurant employee’s hourly-wage requirement. An employee who earns several hundred dollars in tips on Friday night is considered no different from a dishwasher who earns none—even though tips are taxed as income by state and federal authorities. Restaurant owners must pay ever-higher hourly wages to top-earning employees whose take-home pay far exceeds minimum wage.
In their recent meeting with the supervisors, San Francisco’s small-restaurant owners enumerated a long list of other problems. Rising rents, exacerbated by the city’s hostility to new development, burden employers and employees alike. Requirements for permits can keep restaurants closed for months. The owner of one Hayes Valley spot described her frustration: “I have a small restaurant, and it took two years to open—a good eight months for permitting.” She adds that “I don’t even really want to expand anymore, even though it will double my business.”
Restaurants have few options to offset these costs. The Chronicle reported in 2016 that prices at the city’s signature restaurants “have risen, on average, 26 percent since 2010 and 52 percent since 2005.” Tourists and tech employees have shouldered some of the burden through higher prices. But even the city’s well-to-do residents and visitors have been stretched far enough to reduce their consumption.
The New York Times reported last year that some of the city’s restaurants have adopted a “fine casual” business model. Customers find their own tables, fill their own water glasses and get their own drink refills—which allows the restaurant to keep labor costs and prices down by staffing fewer tipped employees. Research backs this up: A forthcoming study from economists at Miami University and Trinity University finds that full-service restaurants hire nearly 18% fewer tipped servers, as a share of employment, in expensive markets.
When all options have been exhausted, many restaurants are forced to close, a frequent occurrence in San Francisco. (My organization has chronicled many of these closings at FacesOf15.com.) According to the Quarterly Census of Employment and Wages, San Francisco lost nearly 1,000 full-service restaurant jobs last year. Annual employment growth in the industry has declined every year since 2012, and turned negative the past two years.
Testifying before the supervisors last month, one San Francisco chef warned that the city is becoming a “nonviable” market for restaurant growth. Don’t tell that to the 2020 Democratic presidential candidates, most of whom support raising the national minimum wage to the same level that helped wreck San Francisco’s restaurant market. The city’s left-of-center legislators have yet to address the hostile policy environment, but Congress should treat San Francisco as a cautionary tale rather than a model to emulate.